THE JOURNAL OF FINANCE • VOL. LIII‚ NO. 4 • AUGUST 1998 Agency Costs‚ Risk Management‚ and Capital Structure HAYNE E. LELAND* ABSTRACT The joint determination of capital structure and investment risk is examined. Optimal capital structure ref lects both the tax advantages of debt less default costs ~Modigliani and Miller ~1958‚ 1963!!‚ and the agency costs resulting from asset substitution ~Jensen and Meckling ~1976!!. Agency costs restrict leverage and debt maturity and increase yield
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a. expected return. b. risk. c. expected return and risk. d. transactions costs. 2. Under the Markowitz model‚ investors: a. are assumed to be risk-seekers. b. are not allowed to use leverage. c. are assumed to be institutional investors. d. all of the above. 3. Which of the following is not one of the assumptions of portfolio theory? a. Liquidity of positions. b. Investor preferences are based only on expected return and risk. c. Low transactions
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four foundation blocks: (1) investors are rational; (2) markets are efficient; (3) investors should design their portfolios according to the rules of mean-variance portfolio theory and‚ in reality; and (4) expected returns are a function of risk and risk alone. Modern portfolio theory is no longer very modern‚ dating back to the late 1950s and early 1960s. Merton Miller and Franco Modigliani described investors as rational in 1961. Eugene Fama described markets as efficient in 1965. Harry Markowitz
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must not only discourage moral hazard (the opportunity to lie/cheat the principal)‚ but also encourage efficiency in production (the agent should produce the optimal units of output that max profits) and allocate risk efficiently (the risk-averse individual bears less risk than the risk-neutral individual). e. Uncertain – it depends on the contract. According to the summary table on contracts we filled out (I’ve posted this on Blackboard) there are instances where the individual was originally not
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A Comparison of Options‚ Restricted Stock‚ and Cash for Employee Compensation Paul Oyer and Scott Schaefer September 4‚ 2003 Abstract Using a detailed data set of employee stock option grants‚ we compare observed stock-optionbased pay plans to hypothetical cash-only or restricted-stock-based plans. We make a variety of assumptions regarding the possible bene ts of options relative to cash or stock‚ and then use observed option grants to make inferences regarding rms ’ decisions to issue
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255-71. [4] Arreaza‚ A. (2003)‚ ‘Liquidity Constraints and Excess Sensitivity of Consumption in Latin American Countries’‚ mimeo‚ Central Bank of Venezuela. [5] Arrow‚ K. J. (1965)‚ ‘Aspects of a Theory of Risk Bearing’‚ Yrjo Jahnsson Lectures‚ Helsinki. Reprinted in Essays in the Theory of Risk Bearing (1971). Markham Publishing Co. [6] Attanasio‚ O. P. (1998)‚ ‘Consumption Demand’‚ NBER Working Paper No. 6466. [7] Attanasio‚ O. P.‚ and Weber‚ G. (1993)‚ ‘Consumption Growth‚ the Interest Rate‚ and
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bond and a 7-year‚ A-rated corporate bond. The current real risk-free rate is 4%. Inflation is expected to be 2% for the next two years‚ 3% for the following four years‚ and 4% thereafter. The maturity risk premium is estimated by this formula:MRP = 0.1% ( t-1) %. The liquidity premium for the corporate bond is estimated to be 0.7%. Finally‚ you may determine the default risk premium‚ given the company’s bond rating‚ from the default risk premium table in the text. What yield would you predict for
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The Four Horsemen of the Apocalypse- Pestilence‚ War‚ Famine‚ and Death- rode together during the 20th century to bring war‚ disease‚ and starvation to the world. It is estimated that around 88 million people perished as a result of the two world wars‚ with over half of the dead of WWII being civilians. The war machine residing over the world was anything but humane. It is interesting then that just a few decades later there is growing debate about how war can be made humane‚ with many proponents
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FOURTH EDITION s STUDENT SOLUTIONS MANUAL Thomas E. Copeland J. Fred Weston Kuldeep Shastri Managing Director of Corporate Finance Monitor Group‚ Cambridge‚ Massachusetts Professor of Finance Recalled‚ The Anderson School University of California at Los Angeles Roger S. Ahlbrandt‚ Sr. Endowed Chair in Finance and Professor of Business Administration Joseph M. Katz Graduate School of Business University of Pittsburgh Reproduced by Pearson Addison-Wesley from electronic files supplied by
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NBER WORKING PAPER SERIES EXPECTATIONS OF RETURNS AND EXPECTED RETURNS Robin Greenwood Andrei Shleifer Working Paper 18686 http://www.nber.org/papers/w18686 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge‚ MA 02138 January 2013 We thank Yueran Ma for outstanding research assistance and Josh Coval‚ Jared Dourdeville‚ Sam Hanson‚ Owen Lamont‚ Stefan Nagel‚ Joshua Schwartzstein‚ Adi Sunderam‚ Annette Vissing-Jorgensen‚ Jessica Wachter‚ Fan Zhang and seminar participants
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